We Expect 3Q 2020 GDP to Contract by -3.0% YoY (consensus Forecast: -4.6% YoY; 2Q 2020: -17.1% YoY) Following the Release of Latest Indicators. With the Exception of Agriculture and Manufacturing Sector, Other Economic Sectors Are Anticipated to Post a Smaller Contraction. Maintain Our 2020 GDP Forecast at - 5.0% YoY (2019: +4.3% YoY) and 2021 at +6.5% YoY.

We expect 3Q20 GDP to contract by -3.0% YoY, above the consensus forecast of - 4.6%. This brings 9M20 GDP to -6.5% YoY. 3Q20 GDP will be released on 13 Nov.

3Q20 GDP: Growth is expected to decline at a slower pace, supported by agriculture and manufacturing sectors.

On the sectoral front, growth in agriculture sector is expected, supported by normalisation in palm oil production (+2.5% YoY; 2Q20: +7.9% YoY). Growth in the mining sector will likely decline further, albeit at a shallower pace, as the production of crude oil (-5.4% YoY; 2Q20: -21.2% YoY) and natural gas (-7.3% YoY; 2Q20: - 18.3% YoY) remained in negative territory on the back of weak global demand. Similarly, weakness in the construction sector is expected to persist following lower construction of residential (-12.0% YoY; 2Q20: -38.7% YoY) and non-residential buildings (-16.0% YoY; 2Q20: -36.2% YoY), as well as civil engineering activity (- 13.6% YoY; 2Q20: -55.2% YoY). Meanwhile, GDP growth is anticipated to be propped up by the manufacturing sector, reflected by manufacturing IPI which posted a turnaround of +3.1% YoY (2Q20: -18.1% YoY) as factories could resume operations during the RMCO. The rebound was driven by improvements in exportoriented (+4.6% YoY; 2Q20: -15.5% YoY) and domestic-oriented sectors (+0.4% YoY; 2Q20: -23.9% YoY). Services sector is still expected to record a smaller decline despite looser lockdown measures under the RMCO. Wholesale & retail trade, food & beverages and accommodation subsector continued to decline (-6.6% YoY; 2Q20: -26.4% YoY), while finance & insurance (+5.4% YoY; 2Q20: -6.1% YoY) and information & communication (+5.1% YoY; 2Q20: +4.5% YoY) subsectors saw stronger growth. Motor vehicles subsector also turned around (+5.5% YoY; 2Q20: - 48.0% YoY), owing to stronger motor vehicle sales due to tax incentives during the quarter (+15.6% YoY; 2Q20: -50.7% YoY).

On the expenditure front, weakness in gross fixed capital formation is expected to continue in 3Q20 due to pullback in investment plans amid cautious investor sentiment. Private consumption is expected to improve but remain weak, as labour market has not recovered to pre-pandemic conditions. In 3Q20, the unemployment rate came off the peak (2Q20: 5.1%) to 4.7% in 3Q20, but remained elevated nonetheless. Number of employees engaged in manufacturing (-2.3% YoY; 2Q20: - 2.2% YoY) and services sector (-2.1% YoY; 2Q20: -3.1% YoY) continued to fall, similar for wages in both sectors (manufacturing: -1.1% YoY; 2Q20: -2.7% YoY, services: -2.5% YoY; 2Q20: -6.4% YoY). While MIER’s Consumer Sentiments Index edged higher at 91.5 for 3Q20 (2Q20: 90.1), it remains below the 100-point optimism threshold. Meanwhile, net export is expected to contribute to overall 3Q20 GDP performance due to weak imports following muted domestic demand.

2020 GDP: Towards the end of the 3Q20, economic activity showed some improvements as manufacturing activity accelerated to +4.3% YoY in Sep (Aug: +2.2% YoY), consistent with the strong improvement seen in exports (+13.6% YoY; Aug: -2.9% YoY). Wholesale & retail trade also rebounded after six consecutive months of decline (+0.1% YoY; Aug: -2.5% YoY). Nevertheless, the recent increase in infection rates at home and abroad could lead to lower growth momentum in 4Q20. Hence, we maintain our 2020 GDP forecast at -5.0% YoY (2019: +4.3% YoY) and 2021 at +6.5% YoY.

Source: Hong Leong Investment Bank Research - 12 Nov 2020